(The online version of this article appears in three parts. Click here to go to part one or part three.)

"What We're Gonna Give Everybody"

E began. I sketched out an approach that my interviews with them, with their House and Senate colleagues, and with assorted analysts and interest groups had suggested could gather broad support. The basic idea would be to offer people a tax credit usable for the purchase of a health-insurance policy (and to pay the

amount of the credit directly to those too poor to owe income taxes). It would be generous enough to buy a decent "Chevrolet" from among competing private health plans. Individuals would have access to some form of insurance pool to ensure affordable group rates. It might be phased in to establish a system parallel to today's employer-based coverage -- offered first, perhaps, to those not covered by either a government plan (such as Medicaid) or a company. The idea would be to avoid giving employers an incentive to drop existing coverage in the near future. Over time, however, it could move the nation away from a system centered on coverage offered by employers to one in which individuals received subsidies and were responsible for -- and perhaps mandated to buy -- their own coverage in the private market.

Obviously, a hundred difficult details are glossed over in this sketch, I said, but something similar was outlined repeatedly by the diverse group I consulted. Could something like this be the beginning of a deal? What follows is a compressed account of the conversation.

McDermott spoke first. "In order to get us off dead center," he said, "we've got to try something in the middle here and see if it'll work. I'm so frustrated by having spent thirty years watching it get worse that I'm willing to try practically anything to get us moving."

"Jim's not going to get what he wants [that is, a single-payer system] anytime soon," McCrery said. "I or some right-wing person is not going to get an unfettered market, which is the individuals fending for themselves. So if we want to solve the problem, we've got to come up with something that's kind of a combination. I think that's possible along the tax-subsidy lines. If we don't do anything, if we just keep going like we're going, eventually I think we'll end up with single-payer. We'll end up with the government controlling just about everything in health care."

This was an argument that McCrery had made to me earlier: that the tendency today to put a patch here and a quick fix there, typified by the push for an HMO patients' "bill of rights," leads inexorably toward heavy-handed federal solutions. "That might take forty years or fifty years," he continued, "but we're going that way now. So I'm willing to accept a lot more government intervention in the market than I normally would to create a system that will have some vestige of the market left in it."

We turned to the key components of a potential health deal, starting with benefits. If a tax subsidy were used, "there would be the element of different levels of health care for different people," McCrery said. "Somebody who is wealthier is probably going to buy a policy that would be richer in benefits than the basic benefit package that I would pay one hundred percent for from the government. That would enable the market to continue to be more innovative than under a single-payer system."

It's the classic conservative argument: beneficial innovations always begin as luxuries for the wealthy. Think of automobiles, telephones, airplanes: first came the breakthroughs funded by the rich and benefiting the rich, and later came dissemination to the masses. This pattern of capitalism, as Milton Friedman argues, has produced higher living standards for more people than any rival form of social organization.

McDermott seemed unconvinced. "But if you and I both need to have doctor visits and all this stuff, right up to the level of a bone-marrow transplant at a hundred and twenty thousand dollars a crack," he asked, "why wouldn't you guarantee that to everybody in the United States? What would you leave above the line that you would say that people who are wealthier can get for themselves?"

"The catastrophic examples are not the kinds of things I'm talking about," McCrery replied. "I'm talking about variances in bells and whistles in insurance policies -- if you want a private room, if you want extra [nursing] help in the room, all those things that people could purchase if they wanted to. The basic plan that would be provided by the government to low-income folks would not have all those."

McDermott wasn't satisfied. "One of the big difficulties will be us agreeing on a basic package."

McCrery, like Bill Bradley earlier this year, suggested the federal-employee health plan as a model. It doesn't define benefits down to every test and procedure, but it assures general areas of coverage, such as major medical expenses and surgical fees. This way there's no stifling of the extraordinary innovation that is now sweeping health-care delivery, whose future shape can't be foreseen. Go too far in defining things rigidly, the Republicans argue, and you end up with inanities like Medicare, which unaccountably still fails to cover prescription drugs, thirty-five years after the program's inception.

"Ultimately," McDermott said, "there has to be a come-to-Jesus meeting someplace where that package is defined: This is health insurance for the country. This is what we're gonna give everybody."

I asked McDermott why defining a detailed benefit package is crucial to liberals when there's no government-defined package in the employer-based system under which most Americans now get their coverage. What's more, as Bill Thomas argues, any honest observer has to concede that a move to what Democrats deride as "two-tier" care would be a vast improvement over the five- or six-tier care we have today, which runs from princely to truly pauperish. And as Richard Armey told me, there are precedents for leaving the actual benefit undefined: with food stamps, Uncle Sam provides the wherewithal but doesn't tell poor folks what to eat; the mortgage-interest deduction helps millions without any need for the government to tell people what kind of house to buy. Why not simply make the health subsidy generous enough and let people pick among competing offerings?

McDermott responded that it's hardly an advertisement for the system of different employers' plans we have today, under which one person may be covered for, say, certain cancer treatments, while another cancer patient is exposed to financial ruin. In any major reform such inconsistencies should be rationalized in favor of some common notion of what every citizen ought to have. It will also be a fight, McDermott believes, to make any tax subsidy substantial enough to buy a decent package, because many Republicans essentially want a cheap tax-style voucher that they can ratchet down over time to limit costs.

Yet both men think that differences here can be bridged. The occupant of the Oval Office, McCrery said impishly, needs to "lock us in a room with his people and say, 'Okay, let's come up with a [benefit] plan that Jim McDermott, Jim McCrery, and President Bush can support.'" McDermott moaned at the very thought. But later he agreed. "If you locked the door and said we don't get any lunch until we come up with a benefit package," he said, "we would have one and be out of here."

"It Would Fundamentally Alter the Insurance Business"

ASKED the congressmen to turn to another central issue: if individuals are subsidized to buy coverage from private plans, how do we protect people who have predictably high medical costs from sky-high insurance premiums that leave them shouldering the full burden of their own care? Everyone agrees that access to reasonably priced insurance for these unlucky souls should be a priority. How to go about achieving it is another matter. Chip Kahn, the head of the powerful Health Insurance Association of America, the industry's lobbying group, told me that insurers want a separate "high-risk" insurance pool, funded by broad-based taxation, to handle these people (as happens now in some states). Liberals say that such funds invariably mean lousy care, and prove that greedy insurers want only healthy customers who don't actually need insurance. Pete Stark is sharp in his response. "Let's cut the crap," a longtime aide told me he has said, and just redline. "You tell me, Chip Kahn, which healthy folks you want to make money off of, and which sick folks you want the government to take, and we'll cut out all the make-believe."

McDermott was warming to a similar rant when McCrery interrupted him. "I wouldn't have a high-risk pool," he said. "I'd just do community rating."

"Community rating" means that everyone pays the same premium, regardless of age, sex, or medical history. This is, of course, the liberal dream. Rates for decent policies in the individual market can easily top $10,000 a year for people with a history of health problems. Community rating, though controversial in theory, is actually widespread today. Employees of large companies enjoy it on a de facto basis, as health risks are spread among thousands of workers. It is the chief virtue of today's otherwise anomalous employer-based system, in which the United States, alone among advanced nations, looks to employers to manage most health coverage.

Our employer-based system was a federally engineered accident. Wage freezes during World War II left fringe benefits as the chief means by which big firms were able to compete for employees. Health care as a job-related perk became common. The government then established a large tax subsidy to ratify this arrangement. Every big company is essentially a socialized health republic, in which the young subsidize the old, and the healthy subsidize the sick -- all of whom pay the same premiums for the same plans.

Reorganizing the individual insurance market to make such pooling work would be more complicated. If insurers were forced to offer the same rate to all comers, young workers would pay far more than they would under policies that recognized their relatively low actual health costs. In large companies young workers opt into such a system because their bosses pick up most of the tab. For this to work in an individual market, the incentive must somehow be replicated -- or else coercion must be involved.

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What cannot be done is to let young, healthy workers opt out, or the insurance pool will face a classic actuarial disaster. It's not physics: if younger workers decline coverage, the average health costs of those remaining in the pool will be higher, and premiums will rise. But higher premiums will prompt more young, healthy workers to drop coverage. The vicious circle will continue until premiums are sky-high and only the sickest are insured, at exorbitant rates.

This is essentially what happened in New York in 1993, when the state forced insurers to apply community rating to their individual policies. Well-meaning officials hoped to extend affordable coverage to everyone; instead they got a new glut of uninsured. The lessons of Insurance 101 are clear: community rating in an individual insurance market requires either a mandate that everyone buy insurance or a subsidy generous enough to keep younger and healthier people in the pool.

McCrery said he was for both the mandate and the generous subsidy -- at least for people of lower income. That a conservative on the health subcommittee of Ways and Means backs these ideas is stunning. McCrery is one of few in his party at present who take this view. He is also one of few Republicans who have studied the issue so closely.

McDermott was amazed. "Did you know that?" I asked him.

"No, I didn't know that."

I asked McCrery, "What brought you to community rating?"

"I looked at it nine ways to Sunday," he explained, "and I don't think there's any other way to do it. I mean, that's not true, there is another way to do it, but I think the simplest way to do it is just to have community rating. Yes, you can have a high-risk pool, with people moving from under the red line to above the red line, but why fool with all that? It's complicated, it's troublesome, it distorts the market. Why not just have community rating and then let insurance companies compete on the basis of value?"

"Covering everybody," McDermott said.

McCrery nodded. "They'd have to take all comers, but they would compete on the basis of service, economies of scale, efficiencies that they could muster to provide better prices, all those kinds of things. They could still be in the business; they'd just have to compete on those bases and not on getting lucky [that is, picking healthier people to insure]."

I turned to McDermott. "You like that?" I asked. His eyes opened wide.

"Yeah," he said. "I don't want to say anything to mess it up." Both men laughed.

The top insurance lobbyist insists that community rating is a nonstarter, I pointed out. Is there anything legitimate in his opposition?

"Depends on what you mean by legitimate," McCrery said. "To them, it's legitimate. Because, I mean, much of their business now ..."

"They don't have the problems that Jim and I face, which include equity in the society," McDermott injected. "They have a different mandate. I mean, corporations take in as much money as they can, pay as little out so that they have it to give to their stockholders. It's not good or bad, it's just what they are." He looked at his colleague. "That's not what Jim and I are. He represents all 600,000 in his district, and I represent all 600,000 in my district. I can't say, well, I represent 440,000 and the other 160,000 are not my concern. I don't have that option."

"It would fundamentally alter the insurance business," McCrery said.

It would -- by bringing the business back to the way it was, in a sense. Community rating was the way health insurance worked, even in the individual market, until the 1960s. Before then insurers didn't have the data to segment people in sophisticated ways according to health risks. Furthermore, health costs were a fraction of what they are today, meaning that people didn't have much to gain by shopping for cheaper plans, and unlucky insurers burnt by a few high-cost illnesses weren't left reeling. But costs and premiums have soared famously for decades now. The data and the technology needed to identify and price policies for lower-risk customers became available. It didn't take long for entrepreneurs to realize that they could target younger, healthier people with lower rates, sweep up a ton of customers, and make a bundle. The fragmentation of the insurance market -- with its emphasis on "cherry picking" the best risks -- began in earnest.

"The Human Genome Project is going to have an impact on this whole process unlike anything we can really imagine at this point," McDermott said. "Because if I'm an insurance company and I get a drop of your blood and I can do your genetics and I find you have these and these and these proclivities, I'll insure you for everything but those. What is insurance at that point?"

"The game is over at that point," McCrery agreed.

I told them I had asked Chip Kahn, of the insurance association, about this, and he had assured me that insurers would never use genetic information that way. The two legislators exploded in thigh-slapping laughter.

"No comment," McDermott finally managed to say.

Is it reasonable to think that community rating could succeed politically? I asked McCrery. Sure, he said -- group insurers essentially already operate under such a system in big companies. I said, But what about the individual marketplace?

"Well, I may have to settle for less [than its purest form]," McCrery said. "I've talked with insurance companies about this. They tell me that as long as they can underwrite based on age and gender [but not health status], they have no problem, they can make it work."

Cecil Bykerk, an executive vice-president and the chief actuary of Mutual of Omaha, one of the largest insurers in the individual marketplace, later told me the same thing. Mutual looks at people's health status only when they sign up, he explained; once they are in the pool, it doesn't go back and adjust their rates for subsequent health developments (as auto insurers do after accidents). As it turns out, prudent pricing can be based largely on age and sex. (This is true, of course, as long as everyone buys insurance as insurance, and doesn't buy in only when he or she becomes sick; as the famous example has it, buying insurance only when the house is on fire defeats the risk-pooling concept altogether.)

At a minimum, then, McCrery's approach would remove any detailed assessment of health risk from the underwriting process, making it impossible to demand unaffordable premiums from sick Americans or to leave them uninsured. McCrery added that if insurers could go this far, they could go all the way and offer the same rates to everyone, period. He would use a reinsurance fund to compensate unlucky insurers that ended up with an undue share of high-cost cases. McCrery conceded that his scheme would make health insurance look more like a regulated utility, and would put today's entrepreneurial cherry pickers out of business. But better that government guarantee access to insurance at equitable prices, he reasons, than that government involve itself directly in the delivery of health care, or in drug prices, doctors' fees, and more -- as it is sure to do, he thinks, if the present system continues to erode until voters ask liberals to fix things their way.

"If we want to save the private health-care system," McCrery told me in a separate conversation, "Republicans are going to have to accept some things that normally would be contrary to our basic philosophy."